South African Revenue Service (SARS) proposed amendment to section 10(1)(o)(ii) of the Income Tax Act No 58, of 1962

by Mardiliana Santana

PRETORIA, Wednesday 22 February 2017 – During the budget speech the Honourable Pravin Gordon announced that in terms of the principle of base erosion and profit sharing, there are countries with hybrid mismatches. South African law has measures to limit double deductions and income exclusions where there is no corresponding deduction and deductions with no inclusions.

As part of this refinement it was announced in the budget that they are considering amending the foreign employment income-tax exemption in respect of employment income in respect of South African residents. Currently the exemption section 10(1)(ii) allows for an exemption to South African residents on foreign remuneration if they are out of the country for more than 183 days of which 60 days are continuous in any 12 month period.

This exemption is for employees of private-sector companies. In terms of the residence-based system of taxation, South African residents are taxed on their worldwide income. However, this exemption on foreign employment income is seen by Treasury and the South African Revenue Services as excessively generous. If a resident works in a foreign country for more than 183 days with no tax payable in the foreign country, that foreign employment income will benefit from double non-taxation. It is proposed that this exemption be adjusted so that foreign employment income will only be exempt from tax if it is subject to tax in the foreign country.

South African living in foreign countries therefore need to consider whether it is their intention to come back to South Africa after their stay in the foreign country and commence with serious tax planning to mitigate the tax they are now going to be levied with. The announcement does not indicate when this amendment is effective from but this could be levied retrospectively from 1 March 2017 and has many implications for these South Africans.

Firstly, as there may be no South African employer, these taxpayers are now obliged to register as provisional taxpayers and submit provisional returns at the end of August and February. Failure to do so will subject taxpayers to penalties for non-submission of the returns and also penalties and interest for late payment of the provisional tax. South Africans who do not have intentions of coming back to South Africa must also consider if they now need to officially emigrate so that they cease to be tax residents for both Reserve Bank and South African Revenue Services point of view.

These proposed amendments have serious consequences and must not be taken lightly in an environment where the Group of 20 (G20)/Organisation for Economic Cooperation and Development (OECD) base erosion and profit shifting project produced a set of minimum standards, recommendations and best practices agreed to by all members, including South Africa. These countries will be exchanging information and as a taxpayer, it is recommended that you look at your best options to avoid extreme tax consequences.